Frequently Asked Questions

What kinds of things determine the mortgage rate, closing costs, and type of program I will qualify for? Answer

How often do mortgage rates change? Answer

How do I know how much house I can afford? Answer

How much actual cash will I need when purchasing my home? Answer

What is the difference between a fixed-rate loan and an adjustable-rate loan? Answer

Q : What kinds of things determine the mortgage rate, closing costs, and type of program I will qualify for?

A : There are many factors that go into determining the mortgage loan program and rate you qualify for.  Some of these include, your loan size, equity position, FICO score, cash reserves in the bank, employment history, how you are paid, how long you have owned your home (for refinancing), and whether you will occupy the property or not.  Our specialty is to take all these factors and match them against the dozens of programs that are available, and see which is best for you.  That's why its so important to work with a Minnesota mortgage lender that offers all of the loan products available. 

Q : How often do mortgage rates change?

A : In a word--  DAILY.  In very volatile markets, rates can change 2-3 times in one day!  To understand why mortgage rates change, we must first ask the more general question, "Why do INTEREST rates change?" It is important to realize that there is not one interest rate, but many interest rates!

• Prime rate: The rate offered to a bank's best customers.
• Treasury bill rates: Treasury bills are short-term debt instruments used by the U.S. Government to finance their debt. Commonly called T-bills they come in denominations of 3 months, 6 months and 1 year. Each treasury bill has a corresponding interest rate (i.e. 3-month T-bill rate, 1-year T-bill rate).
• Treasury Notes: Intermediate-term debt instruments used by the U.S. Government to finance their debt. They come in denominations of 2 years, 5 years and 10 years.
• Treasury Bonds: Long-debt instruments used by the U.S. Government to finance its debt. Treasury bonds come in 30-year denominations.
• Federal Funds Rate: Rates banks charge each other for overnight loans.
• Federal Discount Rate: Rate New York Fed charges to member banks.
• Libor: : London Interbank Offered Rates. Average London Eurodollar rates.
• 6 month CD rate: The average rate that you get when you invest in a 6-month CD.
• 11th District Cost of Funds: Rate determined by averaging a composite of other rates.
• Fannie Mae-Backed Security rates: Fannie Mae pools large quantities of mortgages, creates securities with them, and sells them as Fannie Mae-backed securities. The rates on these securities influence mortgage rates very strongly.
• Ginnie Mae-Backed Security rates: Ginnie Mae pools large quantities of mortgages, secures them and sells them as Ginnie Mae-backed securities. The rates on these securities influence mortgage rates on FHA and VA loans.

Interest-rate movements are based on the simple concept of supply and demand. If the demand for credit (loans) increases, so do interest rates. This is because there are more buyers, so sellers can command a better price, i.e. higher rates. If the demand for credit reduces, then so do interest rates. This is because there are more sellers than buyers, so buyers can command a lower better price, i.e. lower rates. When the economy is expanding there is a higher demand for credit, so rates move higher, whereas when the economy is slowing the demand for credit decreases and so do interest rates.

In short:

• Bad news (i.e. a slowing economy) is good news for interest rates (i.e. lower rates).
• Good news (i.e. a growing economy) is bad news for interest rates (i.e. higher rates).

Q : How do I know how much house I can afford?

A : Generally speaking, you can purchase a home with a value of two or three times your annual household income. However, the amount that you can borrow will also depend upon your employment history, credit history, current savings and debts, and the amount of down payment you are willing to make. You may also be able to take advantage of special loan programs for first time buyers to purchase a home with a higher value. Give us a call, and we can help you determine exactly how much you can afford.

Q : How much actual cash will I need when purchasing my home?

A : Generally speaking, here is what you need to plan on:

• Good Faith Deposit/Earnest Money: The deposit that is supplied when you make an offer on the property.  This will be between $2,000 and $6,000.
• Down Payment: To avoid PMI, you will want to put down at least a 20% down payment unless you are doing a zero down program like an 80/20.
• Closing Costs: Costs associated with your loan like origination fees, discount points, underwriting and processing fees, and third party fees like appraisal, title, escrow, and notary.  This will be between $2,500 and $10,000.
• "Pre Paid" Fees:  These are costs not directly related to the processing of your loan but are required to be paid in advance and due at closing.  Property taxes, fire insurance, and interest on your new loan are all considered Pre Paid costs.  This will be between $2,000 and $7,000.  If you don't want an impound account, these fees will be significantly lower.

 Q : What is the difference between a fixed-rate loan and an adjustable-rate loan?

A : With a fixed-rate mortgage loan, the interest rate stays the same during the life of the loan. With an adjustable-rate mortgage loan (ARM), the interest rate changes periodically, typically in relation to an index. While the monthly payments that you make with a fixed-rate mortgage loan are stable, the payments on an ARM loan will change. There are advantages and disadvantages to each type of mortgage, and we can review those with you.

ASK THE LENDING EXPERTS

Ask an expert: Increasing your credit score
How long it takes to improve your credit score depends partly on your credit history.

Impact of the new bankruptcy laws
The new bankruptcy legislation makes it more important than ever to manage your debt wisely.

Six credit scoring myths
Don’t be misled by rumors. Understand what truly affects your credit score so you can work to improve it.

Ask an expert: How can my credit rating affect me?

What to look for on your credit report

Ask an expert: Why does my credit score differ?

FAQs about credit scores

Improving your credit score

How do I improve my credit score?

Improving your credit score

Understanding the factors that go into your credit report can help you improve a less-than-perfect score.

Credit scoring models are complex and often vary among creditors and for different types of credit. If one factor changes, your score may change, but improvement generally depends on how that factor relates to other factors considered by the model.

Only the creditor can explain what might improve your score under the particular model used to evaluate your credit application. Nevertheless, scoring models generally evaluate the following types of information in your credit report:

• have you paid your bills on time? Payment history typically is a significant factor. It is likely that your score will be affected negatively if you have paid bills late, had an account referred to collections, or declared bankruptcy.
• what is your outstanding debt? Many scoring models evaluate the amount of debt you have compared to your credit limits. If the amount you owe is close to your credit limit, that may hurt your score.
• how long is your credit history? Generally, scoring models consider the length of your credit track record. An insufficient credit history may have an effect on your score, but that can be offset by other factors, such as timely payments and low balances.
• have you applied for new credit recently? Many scoring models consider whether you have applied for credit recently by looking at inquiries on your credit report when you apply for credit. If you have applied for too many new accounts recently, that may negatively affect your score. However, not all inquiries are counted. Inquiries by creditors who are monitoring your account or looking at credit reports to make prescreened credit offers are not counted.
• how many and what types of credit accounts do you have? Although it is generally good to have established credit accounts, too many credit card accounts may have a negative effect on your score. In addition, many models consider the type of credit accounts you have. For example, under some scoring models, loans from finance companies may negatively affect your credit score.

Scoring models may be based on more than just information in your credit report. For example, the model may consider information from your credit application as well: your job or occupation, length of employment, or whether you own a home.

To improve your credit score under most models, concentrate on paying your bills on time, paying down outstanding balances, and not taking on new debt. It's likely to take some time to improve your score significantly.

This information is adapted from "Bound for Good Credit" published by the Federal Trade Commission.

Impact of the new bankruptcy laws

The new bankruptcy legislation makes it more important than ever to manage your debt wisely.

The new bankruptcy laws taking effect in October make it more difficult to wipe out certain types of debt through the bankruptcy process, especially for middle- and upper-income households. But in some instances, they will also help consumers pay off their debts more quickly, saving on interest payments. The new laws are meant to give consumers incentives to manage their debt prudently and to curb previous abuses of the bankruptcy system.

Here are the major changes to the law:

Strict means test
According to the American Bankruptcy Institute, more than 70 percent of Americans who file for bankruptcy do so now under Chapter 7 of the U.S. Bankruptcy Code. Chapter 7 allows individuals to cancel outstanding unsecured debt, such as credit card and medical bills. But under the new law, most households earning more than their state’s median income will have to file under Chapter 13, which requires a plan to pay off at least some of the outstanding debt. The court will apply a strict means test to determine who is eligible to file under Chapter 7. For the first time, individuals filing for bankruptcy will have to document income with pay stubs and tax returns. Creditors will be able to review these items and can challenge any discrepancies in court.

Revised debt payment plans
Individuals filing a debt payment plan under Chapter 13 of the Bankruptcy Code will see changes including:

• The time period required to make payments on pre-existing debt will grow from three years to five. This means households will have to pay back a greater percentage of what they owe.

• Debtors will have to repay the full amount of loans on cars purchased within the 30 months immediately prior to filing for bankruptcy. In the past, the court could lower those payments and the interest rate.

• No one will be allowed to file a Chapter 13 petition more than once every two years. Previously, there was no limit on how often an individual could file.

Mandatory debt counseling
The new law requires debtors to receive credit counseling at their own expense six months before filing. The goal is to encourage consumers to pay back debts rather than simply walk away. Consumers with little resources to repay loans will be encouraged to file for bankruptcy, but others will be challenged to create repayment plans to extinguish outstanding debts. The new law also requires consumers to take a financial-management course after filing for bankruptcy. For information on choosing a credit counselor, visit the Web site of the Federal Trade Commission.

Higher minimum credit card payments
Federal banking regulators are pushing credit card issuers to raise their minimum monthly payment by the beginning of 2006. Credit card companies will have to collect a "reasonable" amount of principal each month, which is typically thought to be at least one percent of the outstanding balance. Currently, about 11 percent of all cardholders pay only the minimum amount required by the card issuer each month. Although it means higher monthly payments, consumers will pay off their debt much quicker, thus paying less interest. A new provision in the law will also require credit card companies to let cardholders know how long it will take to pay off their debt if they pay only the minimum required amount each month.

Rising legal costs
Chapter 7 legal fees typically come in between $500 and $1,000, whereas a Chapter 13 filing can cost $1,500 to $2,000. But under the new law, attorney’s fees are likely to rise because lawyers will be required to sift through tax returns and pay receipts to verify income. If they miss material amounts of income or assets, the attorneys can be subject to penalties.

Want information on consolidating your debts with a home equity loan? Get a FREE LendingTree Guide to Home Equity Loans when you request a home equity loan through LendingTree.

Six credit-scoring myths

Don’t be misled by rumors. Understand what truly affects your credit score so you can work to improve it.

When you apply for a mortgage, line of credit or even a department-store credit card, the lender will check your credit score. This figure, a measure of your past ability to make payments on time and manage your credit, will be somewhere between 300 and 850, with the average American coming in around 678. If your score is too low (most lenders consider anything below 620 to be "sub prime," or higher risk) you may not get the loan you’re seeking or, if you do, it will likely carry a higher interest rate.

With so much riding on this number, it’s important to understand what factors affect it. Unfortunately, there’s a lot of misinformation floating around about credit scores. Here are six of the most common myths and the facts to set you straight.

MYTH #1: The major bureaus use different formulas for calculating credit scores.
The three major credit bureaus -- Equifax, TransUnion and Experian -- sell their services under different names, but they all use the same formula to arrive at their numbers. Your score may vary slightly between the bureaus, however, because each has different information in your file. For example, one bureau’s records may go back longer, or a previous lender may have shared its info with only one bureau and not the other two. Unless the scores are wildly at odds, many lenders will use the one in the middle when they consider your application.

MYTH #2: Closing old accounts will boost my credit score.
Having too many credit accounts can negatively affect your credit score, but canceling them may not improve it. In fact, it could do harm. To measure your ability to manage debt, credit bureaus look at the amount of credit you’re using compared with the total amount you have available. So closing unused accounts reduces your untapped credit and may make you appear overextended. Closing your oldest accounts is even worse because the longer a line of credit is open, the more history you’ve accumulated. If you do close an account, consider closing your newest one and transferring any balance to an older one.

MYTH #3: Shopping around for a mortgage or car loan will hurt my score.
When a lender makes an inquiry about your credit, your score may drop up to five points. For this reason, some borrowers are afraid that comparison-shopping will result in multiple deductions. This isn’t the case. Credit scorers treat multiple inquiries for a mortgage or car loan as a single inquiry, as long as they all come within 45 days. So your best strategy is to do your rate shopping within this time frame.

MYTH #4: Paying off my debts will instantly repair my credit score.
Your credit score is a measure of your past performance, not your current debt load. Paying off your credit cards and settling any outstanding loans will certainly help, but if you have a history of late or missed payments, it won’t undo the damage overnight. Improving your credit score takes time, so after paying down your debts, make an effort to consistently pay your bills on time.

MYTH #5: Companies can fix my credit score for a fee.
You may receive an offer from a company that claims it can fix your bad credit rating. The truth is if the credit bureaus have accurate information, there’s nothing you or anyone else can do to quickly improve your score if you haven’t managed your debts well in the past. (The only way to influence your score is to start managing your debt wisely.) And if there are errors in your file, you can contact the bureaus directly -- you don’t need to pay someone else to do it. The three major bureaus have instructions on how to do this on their Web sites.

MYTH #6: Requesting your own credit report will affect your score.
Credit bureaus do not penalize you for checking your own score, nor do they deduct points for inquiries from landlords or employers who may check your score with your permission. On the contrary, it’s a good idea to check your credit score with all three bureaus occasionally, especially of you plan to apply for a loan. This gives you an opportunity to correct any errors in your file before lenders make their inquiries.

Ask a lending expert

How can my credit rating affect me?

Q. My credit rating has taken a beating lately. How can this affect me?

A. A bad credit rating can cost you. It can result in denied loans or an increase in the interest rates and insurance premiums that you pay. It may even affect job applications.

Credit ratings are used to evaluate your creditworthiness. In general, lenders look at the amount of debt you carry, your ability to repay it and your history. Generally, the more debt you have, the higher risk category you are assigned. If you have a history of late payments, or more serious problems such as a court judgment against you or a personal bankruptcy, a lender may consider you to have a very high risk of default and may choose not to lend you money.

However, many lenders will accept higher-risk clients -- at a cost. According to Fair Isaac Corporation (FICO), the originators of the credit scoring system, a person with poor credit (a FICO score of 500 to 559) who is accepted for a mortgage may have to pay hundreds of dollars more in interest charges on a 30-year fixed-rate term than a person with an excellent rating of 720 or above. There are also sub-prime loans designed for people with bad credit. These have higher interest rates and charge more points, and often there is a higher penalty to repay the loan early. Borrowers with bad credit ratings need to beware of predatory lenders who charge exorbitant rates and fees.

Mortgages and personal loans are not the only places you will pay for a bad credit rating. Insurance companies and auto loan lenders may use your credit score to help determine your policy rate or the interest rate of your car loan. Along with your claims history, some insurers see a poor credit rating as a sign that you are more likely to claim damages. And if you plan to buy a car, a poor credit rating could rev up your interest rate to over 200 percent more than that of a person with excellent credit. A persistent history of missing credit card payments could also impact your job prospects, as some employers check the credit rating of applicants.

The good news is that a bad credit rating isn't permanent. While it may not be quick, if you pay your bills on time, pay down your debt and don't apply for new credit or debt, your score will gradually improve and so will your prospects.

Knowledge Center > Your Money > Your Credit

Why does my credit score differ?

A: Your credit score will change depending on variations in your credit report, which credit bureau issued it and who is evaluating it.

The three credit bureaus in the U.S. are Experian, Equifax and TransUnion. These companies gather information about you from creditors and public records to compile a credit report. A complex mathematical calculation is then applied to features of your report. The resulting number is your credit score.

The three bureaus don't necessarily use the same system to come up with your score. There are many versions of the process, each using different factors and weightings to arrive at your score; this results in inconsistencies between bureaus. For example, Equifax uses the FICO system and Experian uses PLUS. Both use the same principles but have different scales, so your FICO score is between 300 to 850 compared to PLUS's range of 330 to 830.

In addition, the bureaus receive new information constantly and your credit report and score change as a result. Your creditors may not give your information to all three of the credit bureaus or may not relay it to them at the same moment in time. Therefore each bureau may have different information. These discrepancies can result in a difference of 50 points or more among the three company's scores.

Scores from the three bureaus may also vary if the information in your report is incorrect. You should check your credit report frequently -- particularly before requesting a loan -- and correct any mistakes.

Further variations in your report and score can occur when the credit report companies sell them to landlords, insurance companies, auto lenders, credit card companies, mortgage lenders and others. Each purchaser may reevaluate your credit score using its own criteria. For example, credit card companies place greater importance on your credit behavior whereas auto lenders factor in things like down payments on loans, debt-to-income ratio and how long you've been at your job.

Lenders also have different methods for handling multiple scores from the three bureaus. Some discard the highest and lowest and go with the middle figure while others have a formula they apply to the numbers.

LendingTree offers a handy 3 Bureau Credit Report that shows your credit information from all three major credit bureaus in one easy-to-read online report. The 3 Bureau Report includes a free credit score, as well as helpful tips and easy to understand explanations of your credit.

What to look for on your credit report

There is a wealth of information on your credit report. Focus in on key sections and make sense of it all.

You've pulled a copy of your credit report and are now looking at a tangle of information. You see your last three addresses, a long list of businesses that have checked your report and dozens of credit accounts. But what does it all mean? Which information should you look at first? Here's a quick rundown of your credit report and the key information on it.

Why should I care about my credit report anyway?
A credit report is a factual record of your payment history and other credit-related items that lenders use to help determine whether to grant you credit. The information on your report is compiled by the credit bureaus, which regularly receive data on whether you make payments on time and how much you owe. Since creditors are constantly reporting new information to the bureaus, your credit report is always changing.

What should I be looking for?
In a word, inaccuracies. Mistakes are not entirely uncommon on credit reports. Sometimes they're caused by simple human error, other times they occur when credit files of people with similar names are inadvertently mixed. Increasingly, unfamiliar or inaccurate information can also be an indicator of identity fraud -- when someone uses your name and accounts without your knowledge. Look closely at the following areas to catch mistakes or fraud:

• personal information. Are the names and addresses listed on your report accurate? Often, an incorrect address or unfamiliar suffix, such as Jr. or Sr., can be an indication that your file may have been mixed with that of another person. Additionally, a recent address change may indicate that someone is fraudulently opening accounts in your name, but routing the bills to their address.
• public records. If any bankruptcies, judgments or liens are listed in this section, make sure they are accurate and complete. Remember, some bankruptcies can stay on your report for up to 10 years while others cycle off after seven years.
• accounts. You will notice basic information such as your credit limit, current balance and date the account was opened. Also check out the detailed payment information by month for incorrect late payments or charge-offs. Remember to check for unfamiliar accounts or activity on accounts that you thought were closed. Someone besides you could be using the account.
• inquiries. This section shows you who has received information from your credit report and who was given your name during the recent past, as allowed by law. Often, credit grantors will "pre-screen" your credit file in order to offer you special rates. Additionally, inquiries are recorded when you apply for new credit or authorize an employer or insurance company to check your credit history.

What next?
If everything looks accurate, then you can breathe easy. Just remember to regularly monitor your credit to make sure everything stays accurate.

If you find a mistake, then you have the right to dispute the information free of charge. You should contact the credit bureau that provided the information and dispute the inaccurate information. You can also contact the creditor and ask that new, accurate information be provided to the credit bureau.

Finally, if you suspect fraud, contact the credit bureaus immediately and place a fraud alert on your report. Then, contact your credit card companies and bank to protect your accounts.

This information is provided in partnership with ConsumerInfo.com, an Experian company.